In this month’s Auto Industry Brief, I was asked the question: “Will the reduced supply of late-model vehicles in wholesale marketplace restrict the growth of manufacturer certified pre-owned (CPO) sales?” My response was that CPO sales still have a tremendous upside potential, despite the reduction in available supplies. Future volumes will be driven by consumer demand, not available inventory. And, right now, that demand continues to grow.
To see why available inventory is not as big an issue as some think, simply divide the number of CPO sales in a given year by the number of new vehicles sold over the past three years. When you do that for the industry as a whole, you see the ratio rising from 1.1% in 2000, to 3.1% in 2004, to 4.1% in 2010, and to an estimated 5.0% this year.
It’s a low percentage because the vast majority of late-model vehicles in operation don’t change hands in given year, much less in a CPO transaction. Therefore, the steep rise in this percentage (even though still small in absolute terms) could suggest that availability is (or will be) a problem. But, to discount that notion, consider how high the percentage has already risen for certain brands. BMW’s ratio was 15.2% last year and Mercedes’ ratio was 12.1%. To be sure, these are luxury brands with a relatively large numbers of off-lease units every year, but even a mainstream brand like Toyota had a percentage of 5.7% in 2010. That was 1.6 percentage points above the industry average, and given that the percentage in based off of three years of sales, each percentage point increase enables a rise in CPO sales of more than 18%.
This is not to suggest that late-model used vehicles are not in tight supply in the wholesale market. They are – and their prices are proof of that. But, as we have already seen this year, high prices have not reversed the value proposition entailed in a CPO purchase. CPO sales were 8.5% in the first half of 2011. And, since this is segment that had only a modest decline during the recession, CPO sales in 2011 are on pace to set a new record.
Looking at CPO sales relative to total units in operation, as opposed to just wholesale supplies or off-lease volumes, reminds dealers that their potential customer base includes all car owners. With the tightening of wholesale supplies in 2011, many franchised dealers began trolling their service lanes for customers who would like to take advantage of high used vehicles prices and trade in their current vehicle. Although this was often reported as a “new” idea, it is something that good dealers have been doing (and consultants recommending) for the forty years I been with this industry (and probably for a lot longer than that).